`444444444444
`NO. 10-0950
`444444444444
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`ENBRIDGE PIPELINES (EAST TEXAS) L.P., PETITIONER,
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`v.
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`AVINGER TIMBER, LLC, RESPONDENT
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`4444444444444444444444444444444444444444444444444444
`ON PETITION FOR REVIEW FROM THE
`COURT OF APPEALS FOR THE SIXTH DISTRICT OF TEXAS
`4444444444444444444444444444444444444444444444444444
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`Argued February 27, 2012
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`JUSTICE LEHRMANN delivered the opinion of the Court, in which CHIEF JUSTICE JEFFERSON,
`JUSTICE HECHT, JUSTICE WAINWRIGHT, JUSTICE MEDINA, and JUSTICE GUZMAN joined.
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`JUSTICE JOHNSON filed a dissenting opinion, in which JUSTICE GREEN and JUSTICE WILLETT
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`joined.
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`This case involves a dispute over the fair market value of acreage on which a gas processing
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`facility is located. We must decide whether the trial court abused its discretion by admitting an
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`expert’s testimony that allegedly violated the value-to-the-taker rule, which prohibits measuring
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`land’s value by its unique value to a condemnor in determining a landowner’s compensation. We
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`hold that the expert’s testimony violated the rule because it impermissibly focused on the
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`condemnor’s interest in retaining the property and was therefore inadmissible. Because the court
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`of appeals erred when it concluded that the trial court did not abuse its discretion, we reverse and
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`remand to the trial court.
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`Almost forty years ago, the predecessors in interest of Avinger Timber, LLC leased twenty-
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`four acres to a gas processing company so the company could build and operate a gas processing
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`facility. The lease gave the gas processing company an endless right of renewal. The land was in one
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`of the state’s most productive counties for natural gas and already had many pipelines running
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`underneath it. A large gas processing facility was built, and easements were freely granted by
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`Avinger for additional pipelines, roads, and a high-voltage electric line. In 1998, the lease was
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`renewed, but without the endless right of renewal, giving Avinger a reversionary interest in the land.
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`Enbridge Processing, LP (“Enbridge Processing”) took over as the lessee. When the expiration date
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`for the lease was looming and the parties were unable to agree on a rental price for renewal, Enbridge
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`Processing merged with a public utility, Enbridge Pipelines (East Texas) L.P. (“Enbridge Pipelines”),
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`and filed a condemnation petition to condemn the land. The commissioners awarded Avinger
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`$47,580, but Avinger objected to the commissioners’ default award and went to trial on the issue of
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`fair market value of the condemned acreage. Challenges were made to each party’s expert. The trial
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`court allowed Avinger’s expert’s testimony but excluded the testimony of Enbridge Pipelines’s
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`expert. The jury awarded Avinger $20,955,000 as just compensation for the tract, and the trial court
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`rendered judgment on that verdict. The court of appeals affirmed, holding that Avinger’s expert’s
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`testimony did not violate the value-to-the-taker rule, which prohibits measuring a land’s unique value
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`to a condemnor, and the project-enhancement rule, which prohibits consideration of any enhancement
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`to the value of the property that results from the taking itself. The court of appeals held that the jury
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`was entitled to consider the value of improvements constructed by prior lessees and the cost savings
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`to a potential purchaser.
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`We must decide whether Avinger’s expert’s testimony should have been excluded. Because
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`we hold that the trial court abused its discretion by admitting testimony that violated the value-to-the-
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`taker rule by impermissibly focusing on Enbridge Pipelines’ cost savings, we reverse and remand to
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`the trial court.
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`I. Factual and Procedural History
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`In 1973, the Simpson family, which owns Avinger, leased a 23.79-acre portion of their 418
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`acres to a gas processing company, Tonkawa Gas Processing Company, so that Tonkawa could build
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`and operate gas processing facilities. Tonkawa was a private company that lacked condemnation
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`power. At the time of the lease, the land already had several pipelines running underneath it. The
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`1973 lease was a ten-year lease that gave the lessee the perpetual option to renew for an additional
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`ten years, giving the lessee an endless right of renewal. Annual rent was $500. Both parties had the
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`right to arbitrate if no agreement was reached on new rents. The lessee was “the sole owner” of “all
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`gas processing facilities and other improvements” on the property. If the lease expired, the lessee
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`could remove its plant “within a reasonable time not to exceed six (6) months” or the landowner
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`could “negotiate with [the lessee] for purchase” of the gas processing facility.
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`Tonkawa built a large natural gas processing facility on the land, and the Simpsons freely
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`granted easements for roads, additional pipelines, and a high-voltage electric line. At least fifteen
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`separate natural gas pipelines connected to the plant and the site became known as a gas processing
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`hub in one of Texas’s most productive counties. The lease was renewed in 1984 for fifteen years on
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`3
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`the same terms, except that the annual rent was increased to $4,000. Tonkawa then sold the plant to
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`Koch Midstream Processing Company, which took over the lease interest, and Avinger became the
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`successor lessor.
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`In 1998, Avinger renewed the lease with Koch, but on different terms. The lease term was
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`reduced to three years with a three-year option. Annual rent was increased to over $21,000.
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`Importantly, the language giving the gas processing company a right of never-ending lease renewals
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`was removed, giving Avinger a reversionary interest in the land. Koch renewed the lease at the end
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`of the three-year term, and Enbridge Processing became the gas plant operator and successor lessee
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`after purchasing the lease and the plant from Koch. Like Tonkawa and Koch, Enbridge Processing
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`was a private company that lacked the power of eminent domain.
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`With the lease expiration date nearing and the parties unable to agree on a rental price for a
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`lease renewal, Enbridge Pipelines, a public utility company, sent an offer to Avinger to purchase the
`1
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`land for $35,685. At the time Enbridge Pipelines sent the offer, it was not the owner of the gas
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`processing facility or the lessee of the property. Avinger refused the offer. Enbridge Processing then
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`merged with Enbridge Pipelines and secured the right to acquire the property through eminent
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`domain. A petition for condemnation was filed, and the commissioners awarded Avinger $47,580
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`as compensation after it failed to appear at the valuation hearing. Avinger objected to the
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`commissioners’ default award and went to trial on the issue of fair market value.
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`1
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` Enbridge Pipelines was a corporate affiliate of Enbridge Processing. .
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`At trial, Enbridge Pipelines’s expert, Albert Allen, valued the property at $47,940, with the
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`land’s highest and best use as vacant rural residential property using sales comparison analyses.
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`Avinger’s expert, David Bolton, valued the property at $20,955,000, with its highest and best use as
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`industrial property to house a gas processing plant. Bolton used a comparable sales methodology, two
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`income approaches, and additional intrinsic value analyses in reaching his conclusion. In reaching the
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`value of the property, Bolton relied on the provision in the lease which required the lessee to remove
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`all improvements on the land within six months of the lease’s termination. He testified that the value
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`of the property to Enbridge would have been much greater than the $20,955,000 amount he concluded
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`was its market value because the terms of the lease required Enbridge to remove its plant within six
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`months, an obligation that Enbridge avoided by condemning the property. To determine the value
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`added to Avinger’s interest by Enbridge Pipelines’s obligation to remove the gas plant, Bolton
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`consulted with Donald Niemac, a gas-industry expert. Bolton’s report stated that (1) the lease
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`agreement was in effect at the time of the condemnation; (2) the lease agreement forms part of the
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`fair market value of the land burdened by the lease; (3) the lease required the lessee to remove its
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`improvements, including the gas processing facility; (4) Enbridge Pipelines, the condemnor, would
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`not be removing the facility under the terms of the lease; and (5) Enbridge Pipelines’s cost savings
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`is incorporated into the value of the land. Based on Niemac’s testimony about practices in the gas
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`processing industry, Bolton’s expert report concluded that a prudent and knowledgeable investor,
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`2
` Bolton’s report was not submitted to the jury, except for a single page. It was admitted, however, in a pre-trial
`hearing for the judge’s consideration in determining admissibility. Although neither the report nor the testimony should
`have been admitted as proof of valuation, the dissent’s focus on the report’s not having been presented to the jury is
`misplaced. We discuss the report in assessing whether Bolton’s opinion and its underlying methodology violated the
`value-to-the-taker rule.
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`considering Enbridge Pipelines’s cost savings, would pay between $21,750,000 and $28,500,000 for
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`Avinger’s interest.
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`In calculating the comparable sales analyses, Bolton started with six similar industrial property
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`sales with an average value of $13,480 an acre. Bolton then added value for the pipeline
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`infrastructure and the lessee’s cost of complying with the lease by removing the improvements on the
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`land, reaching a value of $22,000,000, or $924,758 per acre. Bolton also valued the land using the
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`discounted cash flow method and the direct capitalization method. Under the discounted cash flow
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`method, Bolton reached a value of $18,904,350. To reach this amount, Bolton speculated that
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`Avinger and Enbridge Pipelines would renew the lease for three additional years and that Enbridge
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`Pipelines would pay $63,158 in rent over the three year term. Bolton calculated Avinger’s
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`reversionary interest in the fourth year as being worth $22,000,000, the value reached for his
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`comparable sales analyses. Under the direct capitalization method, Bolton relied on the cost savings
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`to Enbridge Pipelines in avoiding business disruption and reached a value of $22,275,000. Although
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`Bolton’s expert report concluded that a prudent and knowledgeable investor, considering Enbridge
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`Pipelines’s cost savings, would pay between $21,750,000 and $28,500,000 for Avinger’s interest, at
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`trial, he testified that the land was still worth $20,955,000 even if Enbridge Pipelines did not exist and
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`the plant was “swept away by a tornado.”
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`Both Avinger and Enbridge Pipelines moved to exclude the other party’s expert’s testimony.
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`Enbridge Pipelines argued that Bolton’s testimony impermissibly relied on project-enhancement by
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`considering the enhancements in the property’s value resulting from the taking and value-to-the-taker
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`by considering the land’s unique value to Enbridge Pipelines. Avinger contended that Allen’s
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`testimony was flawed because it did not appraise the land as it existed on the date of the taking— he
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`falsely assumed the property was vacant and barren. The trial court denied Enbridge Pipelines’s
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`motion to exclude Bolton’s testimony, and granted Avinger’s motion to exclude Allen’s testimony.
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`The jury awarded Avinger $20,955,000 as compensation, and the trial court rendered judgment on
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`the verdict.
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`The court of appeals affirmed the trial court’s judgment. 326 S.W.3d 390, 396. The court of
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`appeals held that the jury was entitled to consider the improvements constructed by prior lessees and
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`the cost savings to a potential purchaser to avoid removing and either relocating or replacing the
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`plant. Id. at 405–06. The court of appeals held that Bolton’s testimony did not violate the value-to-
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`the-taker rule, since the value of the tract as a gas processing facility was not unique to Enbridge
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`Pipelines. Id. at 406–08. Additionally, the court of appeals held that the testimony did not violate
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`the project-enhancement rule, since the land’s value was not a result of the taking itself and the plant
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`had enhanced the value of the land long before Enbridge Pipelines manifested an intent to condemn
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`the tract. Id. at 408. The court of appeals also affirmed the trial court’s exclusion of Enbridge
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`Pipelines’s expert’s testimony, stating that “[t]he trial court was within its discretion to conclude
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`Allen’s opinion was unreliable.” Id. at 413.
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`II. Valuation in a Condemnation Proceeding
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`“Compensation for land taken by eminent domain is measured by the fair-market value of the
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`land at the time of the taking.” Exxon Pipeline Co. v. Zwahr, 88 S.W.3d 623, 627 (Tex. 2002); see
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`City of Harlingen v. Estate of Sharboneau, 48 S.W.3d 177, 183 (Tex. 2001). The objective of the
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`condemnation process is to make the landowner whole. See TEX. CONST. art. I, § 17 (guaranteeing
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`7
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`“adequate compensation”). The factfinder may consider the highest and best use of the condemned
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`land. Zwahr, 88 S.W.3d at 628. There is a presumption that the highest and best use of the land is
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`the existing use of the land. Id.; see also United States v. 841 Acres of Land, 680 F.2d 388, 394–95
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`(5th Cir. 1982).
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`Enbridge Pipelines contends that the trial court erred in admitting Bolton’s testimony, as it
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`violated both the value-to-the-taker rule and the project-enhancement rule. Enbridge Pipelines also
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`challenges the exclusion of Allen’s testimony. Avinger responds that Bolton’s testimony properly
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`valued the land’s fair market value and did not violate either the value-to-the-taker or the project-
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`enhancement rule. Avinger also argues that Allen’s testimony was properly excluded.
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`The trial court must act as an evidentiary gatekeeper to exclude irrelevant and unreliable
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`expert evidence. Zwahr, 88 S.W.3d at 629. It has broad discretion with respect to this function. Id.
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`In determining whether an abuse of discretion occurred in the inclusion of Bolton’s testimony and the
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`exclusion of Allen’s, we look to see whether the trial court acted without reference to guiding
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`principles or rules. E.I. du Pont de Nemours & Co. v. Robinson, 923 S.W.2d 549, 558 (Tex. 1995);
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`Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241–42 (Tex. 1985).
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`An expert’s testimony must be relevant to the issues and based upon a reliable foundation.
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`TEX. R. EVID. 702; Zwahr, 88 S.W.3d at 628. Expert testimony is unreliable if “there is too great an
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`analytical gap between the data the expert relies upon and the opinion offered.” Zwahr, 88 S.W.3d
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`at 629; accord Gammill v. Jack Williams Chevrolet, Inc., 972 S.W.2d 713, 727 (Tex. 1998). If an
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`appraiser utilizes improper methodology or misapplies established rules and principles, the resulting
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`testimony is unreliable and must be excluded. Zwahr, 88 S.W.3d at 631.
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`A. Bolton’s testimony violated the value-to-the-taker rule and was therefore inadmissible.
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`Enbridge Pipelines contends that Bolton’s testimony violated both the value-to-the-taker rule
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`and the project-enhancement rule. Avinger responds that Bolton’s testimony properly reflected the
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`fair market value of the tract and did not violate either the value-to-the-taker nor the project-
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`enhancement rule. We hold that Bolton’s testimony violated the value-to-the-taker rule by improperly
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`focusing on the costs Enbridge Pipelines saved by avoiding its obligation to remove the plant under
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`the lease agreement and remand to the trial court. Since a violation of either the value-to-the-taker
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`rule or the project-enhancement rule would require us to remand the case to the trial court, we need
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`not reach the issue of whether the testimony also violated the project-enhancement rule.
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`“[T]he objective of the judicial process in the condemnation context is to make the landowner
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`whole.” Zwahr, 88 S.W.3d at 628. In measuring the landowner’s compensation for condemned
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`property, “the question is, what has the owner lost, not what has the taker gained.” Boston Chamber
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`of Commerce v. City of Boston, 217 U.S. 189, 195 (1910); accord United States ex rel. TVA v.
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`Powelson, 319 U.S. 266, 281 (1943) (“[I]t is the owner’s loss, not the taker’s gain, which is the
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`measure of compensation for the property taken.”) The value-to-the-taker rule prohibits an owner
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`from receiving an award based on a tract’s special value to the taker, as distinguished from its value
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`to others who may or may not possess the power to condemn. See City of Dallas v. Rash, 375 S.W.2d
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`502, 505 (Tex. Civ. App.—Dallas 1964, writ ref’d n.r.e.) (citing United States v. Miller, 317 U.S.
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`369, 375 (1943)).
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`Avinger owned 23.79 acres of land that had been the site of a gas processing facility for thirty-
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`one years. The lease stated that the lessee owned its improvements, including the gas processing
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`facility. The lease required Enbridge Pipelines to remove the plant from the land and restore
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`Avinger’s land to its original condition. The only interest that should have been appraised was
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`Avinger’s interest in the land. However, as we explain, this was not the interest that was valued in
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`Bolton’s report.
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`Avinger was entitled to have its land valued using its highest and best use. See Zwahr, 88
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`S.W.3d at 628. It is presumed that the land’s highest and best use is that of its existing use, which
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`in this case was the site of a gas processing facility. See id. Indeed, it appears that the land was
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`uniquely situated to be the site of a gas processing facility. The land had a thirty-one year history as
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`a gas processing site with all the required permits, had over fifteen separate natural gas pipelines
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`running underneath it, each with its own easement, was connected to a high-voltage electricity line,
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`and was located in one of Texas’s most productive counties. The value of the land as a gas processing
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`site is not exclusive to Enbridge Pipelines. Although Avinger was entitled to compensation for the
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`distinct suitability of its land for a gas processing site, it was not entitled to be compensated for the
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`land’s unique value to Enbridge Pipelines as a result of the lease’s terms.
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`Although Bolton testified that the land was worth $20,955,000 even if Enbridge Pipelines did
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`not exist and the plant was “swept away by a tornado,” other portions of Bolton’s testimony flatly
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`contradict those statements. Bolton’s assessment was premised on the provision in the lease which
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`required the lessee to remove all improvements on the land within six months of the lease’s
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`termination. Bolton’s analysis explicitly took Enbridge Pipelines’s cost savings into account. Bolton
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`testified that his analysis took the existence of the plant into consideration, but he also testified that
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`the land would have the same value if the plant did not exist. It is apparent that Bolton was not
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`valuing the 23.79 acres improved by the pipeline infrastructure that Avinger lost, but rather the gas
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`processing facility that Enbridge Pipelines gained. His analysis took into account the costs of
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`building a new plant and Enbridge Pipelines’s moving costs. In discussing the various appraisal
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`techniques used and explaining that the cost approach was not applicable in this case, Avinger’s
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`expert testified that the “cost to relocate or disassemble and move the plant is a cost that we have to
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`analyze because it’s a factor of the lease.” (Emphasis added). Even the testimony pointed out by the
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`dissent acknowledges that Avinger’s expert considered what “would have to be done to move this
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`plant per the lease.” These moving costs were amounts that Enbridge Pipelines saved by condemning
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`the property; they did not enhance the value of the land that Avinger lost. Enbridge Pipelines is not
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`required to pay more because it avoided the cost of removing the plant. Bolton’s testimony “runs
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`counter to the uniformly announced rule . . . that the condemnee is compensated for his loss . . . and
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`not for any special advantage or benefit which may come to the condemnor.” See United States v.
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`Hayman, 115 F.2d 599, 601 (7th Cir. 1940). We do not suggest that Avinger’s experts should not
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`have considered the effect, if any, that the lease (which expired before the taking occurred) had on
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`the value of the property as required by the Uniform Standards of Professional Appraisal Practice
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`(USPAP). Certainly, it was proper for any amountthat the lease added to the value of the property
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`taken to be considered. However, it was not proper for the experts to consider the cost of removing
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`the plant, as Enbridge was required to do within six months of the expiration of the lease, because of
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`the special value this aspect of the lease provided to Enbridge. Therefore, we hold that Bolton’s
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`testimony violated the value-to-the-taker rule because it impermissibly focused on the benefit to
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`Enbridge Pipelines in avoiding the cost of removing the plant. The trial court abused its discretion
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`11
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`by admitting the portion of Bolton’s testimony that was premised on Enbridge Pipelines’s removal
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`obligation under the lease agreement.
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`B. The trial court did not abuse its discretion by excluding Allen’s testimony.
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`Enbridge Pipelines also asserts that the trial court committed an abuse of discretion by
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`excluding Allen’s testimony. Avinger responds that Allen’s testimony was properly excluded because
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`it valued the land as vacant and unimproved rural residential property. We agree that the trial court
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`did not abuse its discretion in excluding Allen’s testimony.
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`This Court “must uphold the trial court’s [decision to exclude evidence] if there is any
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`legitimate basis for the ruling.” Owens-Corning Fiberglas Corp. v. Malone, 972 S.W.2d 35, 43 (Tex.
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`1998) (citing State Bar of Tex. v. Evans, 774 S.W.2d 656, 658 n.5 (Tex. 1989)). Allen valued the
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`property with its highest and best use as vacant rural residential property. The presumed highest and
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`best use of land is that of its existing use, which in this case was a gas processing facility. See Zwahr,
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`88 S.W.3d at 628. “[T]he landowner can rebut this presumption by showing a reasonable probability
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`that when the taking occurred, the property was adaptable and needed or would likely be needed in
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`the near future for another use.” Id. However, the property had a thirty-one year history as a natural
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`gas facility and there is no evidence indicating that the property was adaptable and needed as
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`residential property in the foreseeable future. Allen did not show why the existing use of the property
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`was not the highest and best use.
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`“Unless an appraisal gives a value based on the land’s condition at the time of
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`condemnation—taking into account all relevant factors that affect its valuation, including the market
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`for its possible future use—it is not relevant to the issue of market value.” Sharboneau, 48 S.W.3d
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`12
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`at 185. Not only did Allen’s testimony fail to explain why the existing use of the property was not
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`the highest and best use, his opinion did not offer fair market value of the land based on its condition
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`at the time of condemnation and did not account for all relevant factors affecting valuation. His
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`opinion did not account for the land’s thirty-one year history as a gas processing site with all the
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`required permits, the fifteen separate natural gas pipelines running underneath the land, each with its
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`own easement, the site’s connection to a high-voltage electricity line, and the land’s location in one
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`of Texas’s most productive counties. Therefore, the court of appeals did not err in holding that the
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`trial court did not abuse its discretion by excluding Allen’s testimony.
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`III. Conclusion
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`We hold that the trial court did not abuse its discretion by refusing to admit Allen’s testimony
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`but did abuse its discretion by admitting the portion of Bolton’s testimony premised on Enbridge
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`Pipelines’s obligation to remove the plant under the lease agreement, which violated the value-to-the-
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`taker rule by impermissibly valuing the costs Enbridge Pipelines saved by condemning the land and
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`avoiding the removal obligation of the lease. Because Bolton’s testimony was inadmissible, we
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`reverse and remand to the trial court.
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`_________________________________
`Debra H. Lehrmann
`Justice
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`OPINION DELIVERED: August 31, 2012
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